Central banks should sell money, not give it away
By Scott Sumner
The Financial Times has an article that discusses how central banks could give away money during a recession, in order to stimulate the economy:
In the past, central banks set the price of money using interest rates. In the future, it seems, they will be giving it away. . . . One problem with this common sense idea is its simplicity, which rarely appeals to economists charged with taking important decisions.
I like uncomplicated ideas, but I don’t see how this idea would be “simple”. Who would get the money? You might argue for a neutral policy of everyone getting a check for $5000. But even that raises questions. Does everyone include children, or is it $5000 per household? Those decisions have distributional consequences, and have traditionally been made by elected representatives.
We are already seeing an erosion of democratic accountability. In the EU, unelected bureaucrats make many important decisions. In the US, a President can now spend billions of dollars on a project even after Congress has rejected his request to approve the expenditure. Do we really want unelected bankers in the private sector (i.e. regional Fed bank presidents) making important decisions on how to allocate government spending?
Furthermore, if the Fed gives away the newly created money, how will the monetary injection be withdrawn if and when it is no longer needed? Under conventional monetary policy, central banks buy assets with newly created money. Those assets are then sold when the QE needs to be withdrawn from circulation. If the new money is given away, then the funds to withdraw the money will have to come from the Treasury, which will then have to raise the money via distortionary taxes on the economy.
Alternatively, think of this in an opportunity cost sense. Consider all the wonderful things we could do if we didn’t have to worry about budget constraints. We could do a radical tax reform to make the system far more efficient. Opposition would be “bought off” by making sure almost everyone gets a cut. (Thus imagine switching from making health insurance tax deductible to a simple health insurance tax credit big enough to benefit almost everyone.) We could build lots of infrastructure, or provide subsidies to low wage workers. By giving the money away in a neutral fashion, the central bank would be depriving the fiscal authorities of the funds required for initiatives with a much greater value to the country.
Note that this is not a partisan position that I am taking. Neither political party in the US favors giving everyone a check. The GOP typical favors cuts in tax rates, whereas the Democrats typically favor targeted programs aimed at specific problems. You can certainly argue that giving money away is better than one of these two alternatives, but it’s pretty hard to argue it’s better than both. A Republican supporting this proposal might assume the money giveaway will not lead to higher future taxes, while a Democratic supporter might assume that it won’t trigger future cuts in social spending. But can either side be confident of their assumption? I don’t see how. (I suspect it would lead to both higher future taxes and lower future spending.)
The most intriguing and practically viable idea of all is emerging from the least likely of sources, the ECB: so-called targeted long-term refinancing operations. In straightforward terms, this is a policy of dual interest rates which involves giving money to both borrowers and savers.
This seems even worse than a simple money giveaway. We already subsidize debt in America via deposit insurance and tax breaks. This sort of debt subsidy program would distort the economy by favoring activities that generate debt over activities financed by equity (or non-debt financed consumption.)
There is a much better alternative:
First, countries need to decide the largest central bank balance sheet that is appropriate (as a share of GDP.) Then set a NGDP level target path at a high enough growth rate so that the central bank balance sheet doesn’t go beyond that threshold. For the US, a 4% NGDPLT should be sufficient.
Second, have central banks buy as many assets as are required to hit their NGDP target.
If something seems too good to be true, it usually is. Having the central bank give money to everyone during a recession is a bad idea.